LAWS OF ECONOMICS: What Happens When The Government Suffocates Business?

The past couple weeks have brought us stellar lessons in economics, and proof that the laws governing this science are like the laws of physics — they cannot be broken.

First up: Volkswagen.

Let it be said for the ten millionth time that no one seeks to pollute the earth. Anyone who says differently is selling something (ht Princess Bride). The Left tries to paint anyone who doesn’t eagerly swallow the Gore-aid as mean-spirited, dirty, rotten, stinking polluters. Conservatives believe we are to be good stewards of the earth, but we know we’re here to use the earth to better our lives. Did you know oil saved the whales, and is largely responsible for the rapid advancement in medicine and hygiene? What about Willis Carrier, the inventor of air conditioning which allowed for the expansion into otherwise uninhabitable land. What would life be like without either of these?

One of the first things we learn in economics is the study of behavior. People respond to incentives, positive and negative. Show up for work, do the job, get paid. Don’t show up for work, don’t do the job, don’t get paid. Provide financial and other incentives for employees to produce more, get more output. And so on.

Adding government to the mix doesn’t mean this law changes. If government supports free enterprise principles – i.e. lets people go about making as much profit as they can within the confines of the law – and you’ll see an economy flourish. On the flip side, whenever a governing body overly taxes and regulates people and businesses, growth is never as good and stagnation reigns.

So, it’s a classic economic comedy to learn Volkswagen, the world’s second largest car manufacturer behind Toyota, produced millions of diesel engines smart enough to know they’re being tested for emissions, throttle back the bad stuff during the test, and resume their alleged air clogging a go-go when the test is over.

Pause for a moment and just admire the German ingenuity that went into such a sophisticated system, and then weep a bit that this had to happen – because it didn’t.

Here you have a car manufacturer, a good one by most accounts, seeking to participate in the automobile marketplace, yet is forced to go to wild extremes to avoid the onerous air regulations set upon them by an increasingly statist busybody whose $8 billion budget is largely dedicated to dolling out grants.

You might say no one forced VW’s hand. They broke the rules, and now have to pay (CEO resigned, stock lost $16.5B in value, fine estimated at $18B). You may be right, but I doubt their original engine design produced as much bad stuff as people claim.

This is the same EPA that, a geologist says, intentionally dumped three million gallons of toxic waste into the Animas River in Colorado, contaminating over 100 miles of shoreline downstream, and causing an estimated $500 million in economic damages. These people do not care about the environment.

Next up: Turing Pharmaceuticals

It costs pharmaceutical companies an average of $5 billion to produce a single drug. Considering the taxes, regulations, and virtual car-jacking that goes on in the industry, is it any wonder why drugs are so expensive? By the way, in many cases the patent clock is running for years before you actually go to market. So you spend all this money to produce the drug (materials, human resources, trials, paperwork, etc.), and the drug may not even have the affect you plan. That the window of time between release and patent expiration is shorter than in other industries unfairly hampers manufacturers’ ability to make a profit.

Last month, Turing Pharmaceuticals bought the drug Daraprim (infection fighter for AIDS patients and some pregnant women) from Impax Laboratories for $55 million. Seeking to capitalize, recover its investment, Turing changed the price from $13.50 to $750. This is an admittedly steep increase, and if I needed a drug of this type I’d shop elsewhere if I could. But once again, we see economics in action.

The consumer backlash was swift and harsh. But then politics also got into the mix -– Hillary chimed in — and it didn’t take long for Turing’s CEO Martin Shkreli, to announce an immediate price drop.

“We’ll know in several weeks how profitable the drug is, if it at all,” Shkreli said in the NBC News interview. “It may turn out that it’s not even profitable at all, even at this price.”

I once had a discussion with a friend who thought the purpose of business was to provide jobs. It isn’t. I know that hurts the feelings of many. The purpose of any for-profit company is profit. If Steve Jobs could have produced all Apple products by himself, he would have, and taken all the profits himself. He was physically, emotionally, financially, and mentally unable, so Jobs joined with partners and, eventually, hired employees to help him. But be clear on this: We all live and breathe on profit. Without it, we starve.

About the author: Michael Cummings

Michael A. Cummings has a Bachelors in Business Management from St. John's University in Collegeville, MN, and a Masters in Rhetoric & Composition from Northern Arizona University. He has worked as a department store Loss Prevention Officer, bank auditor, textbook store manager, Chinese food delivery man, and technology salesman. Cummings wrote position pieces for the 2010 Trevor Drown for US Senate (AR) and 2012 Joe Coors for Congress (CO) campaigns.